mad anthony

Rants, politics, and thoughts on politics, technology, life,
and stuff from a generally politically conservative Baltimoron.

Friday, July 13, 2007

An economic examination of soda and craft store pricing...

So I was talking to my parents while I was visiting them last weekend, and, being the exciting people we are, the conversation turned to soda. Specifically, my dad was trying to figure out why grocery stores typically alternate what brand of soda is on sale - Coke one week, Pepsi the next. Why not just keep it at one price?

Finally, MadAnthony had a use for that economics minor from his undergrad days. My answer? Price Discrimination. It lets Coke and Pepsi split their customers into two groups - those who are loyal to Coke or Pepsi will buy their product no matter what the price is, so they get full price sales during the weeks they aren't on sale. Price-conscious shoppers will buy whatever is on sale, so they get sales to those people that they wouldn't normally. This lets them extract more money from the wealthy Cokeheads, while still selling soda to the cheapasses at a lower price.

But, as my dad pointed out, that doesn't work on him. He prefers Pepsi, but is thrifty, so he buys enough during a Pepsi week to keep a supply through the lean weeks while Coke is on sale. Which is true. There isn't a way to achieve perfect price discrimination - to find the exact high amount that each customer is willing to pay and charge them that amount - so they have to deal with the fact that some people who would willingly pay more are still able to find a way to pay less. Chances are, they still make more than they would if they charged only higher or only lower prices.

And there are probably other reasons. The sales make it harder for value-priced colas (store brands, RC, ect) to compete, because you can get the brand name for about the same price when it's on sale. Being on the front page gives exposure to the brand, and it may draw some shoppers into the store, so the store likes it. It also may get customers to try new products. I'm cheap, so I try to buy soda on sale, but I also drink a lot of soda and don't plan terribly well, so sometimes it's a Coke week and I need soda, so even though I generally prefer Mountain Dew (a Pepsi product), I'll buy Coke if it's on sale. And that will expose me to products I wouldn't buy at full price, but might start buying. I recently bought a bunch of Vault Zero because Coke was 5 for $10 at Giant, and I really liked it. I would probably even pay a little extra for it.

There is another layer of complexity to this - on sale can still mean a different price. Some week's sale prices are better than others, and that's another way the stores and the soda manufacturers can try to better seperate customers on willingness to pay.

Although I understand the soda-pricing model, I don't really get craft store pricing. Until a year or so ago, I never needed to set foot in a craft store. It's like a whole different world, one mostly aimed at women, but I needed some poster frames so my collection of Apple and liquor posters could be transformed from college-dorm decor to high art. I also have needed to buy frames as gifts for family members, because I'm cheap and realized that I could get a digital picture blown up and frame it and it would look like a way nicer gift than it was.

So I've ventured into craft stores - the AC Moore's and Michael's, where they have entire departments dedicated to things you didn't know people would ever need to buy in quantities that you never thought were made - things like fake flowers and needlepoint kits and beadazzlers. Every time I go, I'm puzzled by the pricing model. All the prices are set high, but nobody actually pays that price. Pretty much everything in the store will be on sale - 50% off all silk flowers, 40% off all store-brand frames. For the stuff that isn't on sale, there will usually be a 40% or 50% off any one non-sale item in the circular that's either in the paper or comes in the mail.

I could see the price discrimination aspect if stuff was sometimes on sale - sell to the cheap (people with a low willingness to pay) people during the sale weeks and the suckers the other weeks. But it seems like almost everything is always on sale. Sure, I guess if you are buying more than one of a non-sale item, and only have one coupon, you would pay full price, but it's usually difficult to find stuff that's not on sale. I guess that not everyone may know about the coupons and pay full price, but I knew about them and I'm a novice to craft stores (although an expert on sale prices). The other thing is that, to me, it seems like craft store stuff isn't something you need - do people really need silk flowers so badly that they can't wait for them to go on sale?



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